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In the Carbonated Soft Drink industry economies of scale are influenced by extremely high fixed costs and very low marginal costs. Marginal costs for this industry include concentrate syrup and carbonated water. Fixed costs include among other things plant, equipment, advertising and insurance. In a situation involving economies of scale the larger the firm, the more efficient they will be. As a result of economies of scale, retail revenues in the industry come close to $0 billion in 185. Per capita soft drink consumption nearly tripled from 160 to 185. Economies of scale led to increasing trade deals and discounts, which largely influenced the decline in prices. As a way of reducing production costs firms in the industry halved the amount of bottlers from ,8 in 175 to 1,10 in 185. Both the increase in retail revenues and per capita consumption were a direct effect of economies of scale as well as falling prices and diminished amount of bottlers. Size matters in relation to economies of scale. In essence the bigger the industry, the more efficient they are bigger is better. Consolidating two firms would ultimately lead to increases in both production and volume, and a decrease in price, which would prove to be beneficial to both the industry and its consumers.
The Reagan administration was not especially strict in regards to consolidation and proved to be very optimistic towards the idea of change. As a direct result of the lenient state of the Reagan administration, both Pepsi and their plans to merge with Seven-Up, and Coca-Cola with their intentions of teaming up with Dr. Pepper believed that their proposed mergers would be approved as well as supported by the government and the Federal Trade Commission (FTC). Both firms observed the anti-trust law set forth by the Hart-Scott-Rodino amendment and awaited the consent of the FTC.
Certain economic and political factors influenced the premeditated move by Coca-Cola and Pepsi's response. In the case of Pepsi, the firm was fundamentally trying to acquire Seven-Up from the Philip Morris Company to increase the size of their entity and their level of efficiency therefore complying with the familiar idea of economies of scale. Pepsi also had an avid desire to reach the magnitude of Coca-Cola and eventually surpass them as the more superior firm.
In response to Pepsi, Coca Cola had a consolidation plan of their own, which involved purchasing the Dr. Pepper Company for $470 million. This proposed consolidation would put Coca Cola in a win-win situation. If the consolidation were approved by the FTC Coca Cola would increase in both size and volume and would continue to be a larger entity in comparison with Pepsi. On the other hand, if the consolidation was declined Coca Cola would be no better or worse off than before Pepsi's proposed bid.
Both Seven-Up and Dr. Pepper lost in the sense of economies of scale. If the proposed merger with Pepsi took place Seven-Up would have increased their size and become more efficient. Likewise, if Coca-Cola acquired Dr. Pepper they would have become part of the largest carbonated soft drink firm in the world and indubitably would be considered efficient due to the size of the firm alone. The consumers lost in regards to this situation because if the mergers had played out prices would have decreased because of the higher volume brought about by increased efficiencies. Pepsi had a chance to enhance economic efficiency by increasing their volume and becoming a larger corporation with the addition of Seven-Up but in the end this was a lost opportunity. Coca Cola did not win or lose. They still ended up where they had started before the proposed merger. Regardless of the possible outcomes, Coca Cola would still remain the largest carbonated soft drink corporation.
The FTC established a set of guidelines in 1, which demonstrated how the Pepsi-Coke case influenced future thinking regarding Anti-Trust enforcement policies. Four out of the six guidelines, recognizing economies of scale based on the cost structure of the company, recognizing efficiency gains, strengthening weak competition by way of mergers, and having a relaxed view on the 5% automatic trigger, showed the progression from a structural to a more behavioralist market-based view on anti-trust issues. If these guidelines were established during the time of the proposed Coca Cola and PepsiCo mergers, the mergers would have been approved. Both of the proposed mergers would have benefited both the consumers and the economy as a whole due to the significant increase in efficiency.
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